What is Employers Liability insurance and why do I need it?

Jan 24, 2020

Slips and Trips

We are often asked to explain when Employers Liability cover is required so we have produced this general guide to help. However, everyone’s circumstances are different and change from time to time, so please speak to us rather than relying on this general note.

There is a statutory requirement under the Employers’ Liability (Compulsory Insurance) Act 1969 (‘the Act’).

 

What is Employers Liability Insurance?

Employers Liability insurance (‘EL’) covers a company for liability for damages in respect of bodily injury death or disease caused to employees arising out of and in the course of their employment by the insured. Cover also includes:

  • claimants costs and the insured’s own costs if incurred with the insurers consent
  • defence costs and expenses
  • court attendance costs

The Employers Liability policy will first fund the legal defence of such claims and, in the event that the policyholder is held liable for the employee’s injury, the policy will compensate them up to the limit of indemnity of the policy.

All Employers Liability policies are required by law to carry a minimum limit of indemnity of £5m for any one claim. It is industry standard, however, for cover to be issued with a £10m limit – please note that work carried out offshore &/or with asbestos is an exception to this and is normally limited to £5m. Advice should be sought from Yutree to ascertain if higher indemnity limits are required or more appropriate.

You are responsible for the health and safety of your employees while they are at work. Please note that the Health and Safety Executive (HSE) is the enforcement authority for Employers Liability insurance compliance. Your business may be fined up to £2,500 for any day you trade without suitable insurance.

 

Do I really need it?

You must have Employers Liability if you have employees (see below) unless you are exempt under the Act. The following employers are exempt:

  • most public organisations including government departments and agencies, local authorities, police authorities and nationalised industries;
  • health service bodies, including National Health Service trusts, health authorities, primary care trusts and Scottish health boards;
  • some other organisations which are financed through public funds, such as passenger transport executives and magistrates’ courts committees

 

What is the definition of an employee?

  • Whether or not you need Employers Liability insurance depends on the terms of the employment contract. This can be spoken, written or implied. It is the nature of the relationship with the people who work for the company and the degree of control that they have over the work that they do which defines how they should be treated for insurance purposes.

 

 You are obliged to insure Employers Liability where:

  • You deduct NI and income tax from the money you pay employees;
  • You have the right to control where and when your employees work and how they do it;
  • You supply your employees’ work materials and equipment;
  • You have a right to the profit your workers make;
  • You require that person only to deliver the service and they cannot employ a substitute if they are unable to do the work;
  • Your employees are treated in the same way as other employees, for example, they do the same work under the same conditions as someone else you employ;
  • Your employees work for you on an unpaid basis whether they are students, volunteers, interns or other helpers;
  • Your employees are students, on a work experience programme, or taking part in a training programme

 

You may not need Employers Liability insurance where:

  • Your employees do not work exclusively for you (for example, if they operate as an independent contractor);
  • Your employees supply most of the equipment and materials they need to do the job;
  • Your employees are clearly in business for their own personal benefit;
  • Your employees can employ a substitute when they are unable to do the work themselves;
  • Your employees are all close family members (this exemption only applies if the company is not incorporated as Ltd company)
  • You do not deduct income tax or national insurance. However, even if someone is self-employed for tax purposes they may be classed as an employee for other reasons and you may still need employers’ liability insurance to cover them
  • Your company employs only the owner where that employee also owns 50% or more of the issued share capital in the company

 

One area which is commonly misunderstood is around insuring sub-contractors. You will employ sub-contractors on one of two bases:

  • Labour only Sub-Contractors (LOSC) – LOSCs work under your clients’ supervision and direction. Your client will supply materials and tools. The LOSC is paid wages by the main contractor and is classed as an employee for whom your client should buy Employers Liability insurance
  • Bona Fide Sub-Contractors (BFSC) – BFSC work under their own supervision and direction. They will provide their own materials and tools. They are generally employed to carry out a specialist/particular type of work within a job (i.e. scaffolding/plumbing etc). The BFSC should have their own liability insurance in place and it is important that you always check this for your own protection. If the BFSC’s insurance fails, you are required to provide contingent cover. If there is an accident and a BFSC is injured and their own Employers Liability cover fails, you could be responsible for a claim under your public liability section. You do not need to buy Employer’s Liability insurance for BFSC.

The safest way to consider this is that, if a master/servant relationship exists, then the sub-contractor is an employee. If it doesn’t, they are a BFSC and therefore not classed as an employee under the Act. To help you to ascertain this, a servant must act under the command of a master.

 

Can I buy Employers Liability cover on its own?

Generally, no. Employers Liability cover is most often “bundled” with Public & Products Liability cover.

 

Wages estimates for my insurer – why is it needed and what should I include?

In order to assess the premium, insurers will normally require an estimate of the payments to all employees. Broadly the higher the wage roll, the greater the exposure to insurers.

Payments to employees means the total wages, salaries and earnings (including anticipated bonus payments) without any deductions in respect of NI, Income Tax, holiday with pay or contributory pensions.

Often the annual premium is calculated on the estimated figures provided at the start of the policy period. These estimates are often adjustable at the end of each policy year and you will be required to declare the actual figures. Should the actual figures declared differ from the estimates provided the insurers may amend the premium retrospectively.

You can find more guidance on Employers Liability insurance from the Health and Safety Executive and the Association of British Insurers.

Please speak to an insurance specialist at Yutree on 01638 660651 for specific advice tailored to your business.

 

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